Shelby Township lawsuit settlement looking at millions, nears agreement

By: Kara Szymanski | Shelby - Utica News | Published October 5, 2020

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SHELBY TOWNSHIP — A settlement is possible in December to a complaint filed on May 24, 2018, at the Macomb County Circuit Court against Shelby Township by a resident and his attorneys from two law firms, Kickham Hanley and Joelson Rosenberg, that challenged the water rates and the sewage disposal rates that are charged to residents by the township.

Notices were sent out last year informing residents of the class action lawsuit. Now, residents will be receiving notices of the proposed settlement agreement amount.

According to Shelby Township Attorney Rob Huth in comments made last year, the township became a target in this suit because it “prudently saved money so that the water and sewer systems could be properly maintained.”

Huth had said that the township did nothing wrong and acted in the best interests of taxpayers. He said he expected a favorable outcome for the township in court.

The township is now looking at possibly millions of dollars for the settlement amount for the lawsuit.

“The Circuit Court entered an order that permits notice to the Shelby Township rate payers proposing a total settlement of $6,000,000. The court will monitor the responses from those that received the notice and make a decision on whether the case is settled in December,” Huth said.

According to the complaint, the township allegedly has been taking in millions of dollars in revenue from its water customers in excess of the actual cost of the services.

The complaint states that the township had a depreciation rate that the township’s water customers pay, which is a form of tax that has not been voted on by the township’s voters and is a violation of the Headlee Amendment to the Michigan Constitution.

Greg Hanley, from Kickham Hanley PLLC — the leading law firm representing Ralph Staelgraeve, of Shelby Township, and the residents of Shelby Township in the class action lawsuit — had said this overcharge is not allowed.

In the complaint, it said that the depreciation charge is what the Michigan Supreme Court found to be an unconstitutional tax in the court case of Bolt v. City of Lansing. The complaint states that the charges are not legitimate user fees, but rather taxes under the Bolt decision, motivated by raising revenue and not a regulatory purpose, because the amount charged to the customers is “grossly disproportionate” to the township’s actual costs of providing the service, and the charges are imposed.

It also alleged that the charges are arbitrary and capricious and that they violated the township’s own ordinance, state statutes and common rate-making principles. The lawyers argue that because of this, the charges are invalid even if they are not found to be unlawful taxes.

The township buys water from the Great Lakes Water Authority for resale to water customers.

Shelby Township establishes its own water rates and directly bills the users; however, Michigan  law prohibits municipalities that purchase water from an authority from charging a retail rate that exceeds the municipality’s actual cost of providing this service.

According to the complaint, the township’s water and sewer fund’s financial statements and other documents show that the township had included enhanced water and sewer rate charges for the cost of servicing the interest on long-term debt related to water and sewer infrastructure improvements, as well as the amount of depreciation due to the township’s water and sewer system infrastructure components.

The depreciation expense is a non-cash expense that accounts for the loss in value of the water and sewer system infrastructure, the complaint states, and the township calculated that loss over a period of 50 years. Including depreciation in the township’s rates is incorrect, according to the complaint, because the township sets rates with a “cash basis” approach, which seeks to collect money to cover cash expenses. The lawsuit calls this a “common error” and says it results in counting some capital costs twice.

In terms of cash reserves, the lawsuit said that the township has $44 million in reserves and $27 million designated for “asset replacement.” The lawsuit says the township doesn’t use the reserves for that purpose and pays for water and sewer “asset replacement” through rates.

The lawsuit says that the township’s planned capital improvements to water and sewer infrastructure are $4 million for the time period of 2016-2022, and it says the asset replacement reserve is “almost seven times higher than the planned capital improvement expenses.”
The law firms state that the township should be using the reserves to finance ongoing capital improvements to its water and sewer infrastructure.

According to the complaint, excluding capital expenditures, the actual overcharge to customers exceeds $13.6 million.

The lawsuit asked for the court to order the township to refund the money collected as depreciation charges dating back to Jan. 1, 2013, through June 30, 2020. It also asked for costs and expenses for attorneys, accountants and experts.

Experts from the Kickham Hanley PLLC firm believed that the overcharge exceeded $25 million over the last seven years.

A settlement conference date has been scheduled for 8 a.m. Dec. 21.

Hanley said his firm believes the proposed settlement amount is acceptable.

“We believe the settlement is fair and reasonable,” he said.

You can find the settlement agreement and recent court order at kickhamhanley.com/class-actions.

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